What is an Insurance Deductible?

The term “insurance deductible” is a bit of technical jargon that actually has a very simple definition. After a claim is filed, it’s the amount you’ll have to pay before the insurance company begins kicking in its share. The way your insurance deductible is set up depends on the type of coverage and policy you have, but the basics are the same. 

Your insurance deductible is different from your premium, which you might pay on a monthly, quarterly, annual or semi-annual basis. While the premium is the fee you’re paying to be a policyholder, the deductible goes toward actual costs you encounter along the way. 

Take health insurance, for example. Your monthly premium is what buys you coverage, while any additional in-network medical bills you pay will go toward your deductible.

It’s a lot to unpack. Here are the basic ins and outs of how your insurance deductible works.

How does an insurance deductible work? 

Once your insurance deductible is met, your insurance company will begin paying out a portion of your costs. Let’s assume your health insurance deductible is $1,000. This means you’re responsible for the first $1,000 of out-of-pocket medical costs. Once you meet this deductible, your insurance company will pay for some of the fees you incur. How much they’ll cover at this point—also known as coinsurance—varies from policy to policy. Just keep in mind that this doesn’t include any copays you might have to pay. (More on this shortly.)

Insurance deductibles generally reset at the beginning of each calendar year, or the beginning of whatever year-long term you, or your company, initiated coverage. Translation: Once you’ve met your deductible for the year, it’s an ideal time to schedule any health procedures you’ve been putting off before you’re back at the financial starting line. 

How does a premium come into play?

When an insurance company agrees to take you on as a customer, they’re signing up for a good amount of risk. They’re agreeing to pay out insurance claims on your behalf, if and when they come up. Therefore insurance companies are operating under the assumption that this amount will add up to be less than what they collect in overall premiums. 

Again, your insurance premium is a separate fee—but it’s actually an important factor when it comes to determining your insurance deductible. Opting for a higher premium will result in a lower deductible. The opposite is also true. It’s an important detail to consider when managing your monthly budget. If money is tight, going with a higher deductible insurance plan can free up extra cash to put toward other financial goals, like paying off high-interest credit-card debt or setting money aside for retirement. 

Just one word of warning: Going too lean with your insurance policy may result in a massive deductible that you’ll be unlikely to ever meet—or worse, so-so coverage that doesn’t offer adequate protection when you need it. Ask yourself if you can reasonably afford your insurance deductible. If you’re able to keep the equivalent on hand in a savings account, going with a higher insurance deductible can go far in giving your budget some breathing room.

How do deductibles vary by type of plan?

Insurance deductible options vary from plan to plan. They’re also structured differently across various types of insurance. Here’s a breakdown of how deductibles work in most plans: 

Health insurance

A high-deductible health plan (HDHP) is just that—a policy that trades a higher deductible for a more reasonable premium. For 2020, the IRS defines an HDHP as any plan with a minimum deductible of $1,400 for individuals and $2,800 for families. 

And it’s becoming the norm for many Americans. Among workers enrolled in an employer-sponsored health plan in 2018, the International Foundation of Employee Benefit Plans put the average deductible at $1,491 for individuals and $2,788 for families. But HDHPs have one major perk. If you have one, you’re eligible to open a Health Savings Account (HSA). This tax-advantaged account lets you sock away pre-tax dollars to spend on eligible healthcare expenses, including deductibles.

In addition to the insurance deductible and premium, your health insurance plan may also include copays and coinsurance. The first is a fixed amount you’ll pay when visiting a healthcare provider. (FYI, some preventive services, like annual checkups, are free under many health plans.) Coinsurance refers to what you’ll pay after meeting your deductible, and it varies from plan to plan. If yours has an 80/20 split, for example, then you’ll pay 20 percent of your healthcare costs once you hit your insurance deductible.

Auto insurance

Whether you’re in an accident or your car gets damaged or stolen, auto insurance should come to the rescue. The process begins with your insurance company opening a claim for the event. Your insurance deductible represents how much you’ll have to pay before they’ll pick up the tab. So if your auto deductible is $600, and you file a claim for $2,500 worth of damages, your insurance policy will cover $1,900. 

The national average cost of car insurance is just over $1,600 per year, according to recent data from NerdWallet. Again, many people lock in lower rates by opting for higher premiums. Just be sure to read the fine print before making any final decisions. A low premium won’t do you much good if you’re on the hook for an insurance deductible you can’t afford if you have to file a claim.

Homeowners insurance

If you’re a homeowner and your home is damaged, your belongings are stolen, or someone is injured on your property, you’ll turn to your homeowners insurance policy to see you through. The average annual premium sets most people back about $1,192.

The majority of homeowners' insurance policies actually come with two different types of deductibles, according to PolicyGenius. There’s the standard insurance deductible, which usually runs in the neighborhood of $500 to $2,000. You also may have a percentage deductible for weather-related damage from wind, hail or hurricanes. This generally ranges from 1 percent to 5 percent of your home’s insured value.

Pet insurance

This type of coverage isn’t structured the same way as health insurance for people. It’s based on reimbursements, so the policyholder fronts the money to cover qualifying medical expenses and then files a claim for reimbursement. Your insurance deductible may run annually, or it could be per-incident based, depending on your plan. 

But pet insurance may not cover everything, even after hitting your deductible. Preventive care is generally excluded. What’s more, most plans reimburse pet owners for 70 to 90 percent of covered costs, according to PolicyGenius. Be that as it may, the average monthly cost for pet insurance is about $50 for dogs and $30 for cats.

How do I pick the right deductible amount?

Without sacrificing coverage, it comes down to looking at your budget and asking yourself what’s more important—a lower monthly premium or a more reasonable insurance deductible. Going with a health insurance plan with a $10,000 deductible means the odds are slim that you’ll meet it during one calendar year, which means you’ll be shelling out a boatload in out-of-pocket costs.

Like anything else, reading the fine print on your policy before making a decision is always a good idea. Many health plans, for instance, have separate out-of-network deductibles that are often higher. That’s another reason it pays to shop around. Choosing the right insurance deductible amount ultimately comes down to doing what works for you, your family and your budget.